the road from bali: business opportunities and obstacles surrounding climate change

Building Relationships | Pioneer Thinking

The Road from Bali:

Business Opportunities and Obstacles Surrounding Climate Change

Introduction

A large international climate change conference attended by

representatives from 190 countries took place in Bali in December

2007. The goal of this meeting was to accelerate the international

response to climate change started by the Kyoto Protocol in 1997.

The Bali talks mark the formal launch of a two-year process

to create a broader, more ambitious climate agreement to

succeed the Kyoto Protocol by the end 2009; to fi nd agreement

on the main agenda items—reduction of greenhouse gases,

adaptation, technology and fi nance; and set a timeline to fi nish

these negotiations.

Its urgency has been underscored by the recent release of U.N.

climate reports that have warned of worsening climate impacts

from greenhouse gas emissions than initially expected, including

more heat waves, droughts, storm damage and rising seas. Climate

change is now here, according to the reports. The question now is

how to adapt to the changing climatic conditions and keep global

temperature rise to under 2 degrees C by 2050 to avoid the worst

effects. The stakes are global in scale.

The Road from Bali: Business Opportunities and Obstacles Surrounding Climate Change 2

The IPCC and the Kyoto Protocol—What Are They?

Since 1988, the Intergovernmental Panel on Climate Change, or IPCC, has

assembled reports summarizing the scientifi c, technical and socioeconomic

aspects of climate change. The IPCC strives to present the scientifi c case for

human-induced climate change, its potential impacts and options for adaptation

and mitigation.

IPCC reports are an indispensable part of almost any climate change debate.

In 2007 and despite the lack of Hollywood razzamatazz, the Intergovernmental

Panel on Climate Change won the Nobel Peace Price. This recognition coincided

with the release of the IPCC Fourth Assessment Report which proves beyond

doubt that climate change is happening and accelerating. These reports

continue to drive policies and news coverage.

The IPCC reports also serve as the underpinning for the Kyoto Protocol, which is

an international agreement to reduce emissions of greenhouse gases, or engage

in emissions trading if they maintain or increase emissions of these gases.

The Kyoto Protocol now covers more than 170 countries globally and more than

60% of countries in terms of global greenhouse gas emissions. As of December

2007, the US, and Kazakhstan are the only nations that have not ratifi ed Kyoto.

This treaty expires in 2012, and international talks began in May 2007 on a future

treaty to succeed the current one. Bali was an important milestone in this quest

for new agreement.

Under Kyoto, governments fall into two categories: developed nations, referred

to as Annex I countries (which agree to limit greenhouse emissions and submit

an annual greenhouse gas inventory); and developing nations, referred to

as Non-Annex I countries. They have no greenhouse gas emission reduction

obligations but may participate in the Clean Development Mechanism.

By 2008-2012, Annex I countries must reduce their greenhouse gas emissions

by a collective average of 5% below their 1990 levels, according to Kyoto

standards. Recent IPCC reports suggest that the actual cuts need to stabilize

the climate are signifi cantly higher.

Kyoto includes “fl exible mechanisms”—which allow Annex I economies to

meet their greenhouse gas emission limitation by purchasing GHG emission

reductions from elsewhere—this is also known as carbon trading.

The Kyoto Protocol

now covers more than

170 countries globally

and more than 60%

of countries in terms

of global greenhouse

gas emissions.


Every business emits greenhouse gases—because

every enterprise uses energy, vehicles or infrastructure.

Businesses are going to have to pay more for emitting

greenhouse gases, but can potentially reap greater ben-

efi ts for their efforts to cut emissions. Thus every business

is a stakeholder in Bali and subsequent similar events.

Business will also have to communicate effectively about

these issues, and do so with a wide range of stakeholders:

governments, regulators, NGOs, the media, employees

and the general public.

How do you communicate CBRE’s stance on climate change and why?

CB Richard Ellis has long been recognized for success and leadership in the commercial

real estate industry. In 2007, our company took a strong position in support of environmental

sustainability. Studies have shown that buildings account for as much as 40 percent of the

earth’s greenhouse gas emissions. As the world’s largest real estate services fi rm, we directly

manage more than 1.7 billion square feet of property and corporate facilities, and we advise

the owners and occupiers of billions more square feet. By aggregating and sharing our expertise in “green” building

policies, processes and procedures we can make a tangible impact on improving energy effi ciency, reducing

greenhouse gas emissions and slowing climate change. In addition, as a global company of more than 24,000

employees and hundreds of offi ces worldwide, we have made a commitment to operate our day-to-day business in

ways that are environmentally sustainable and will help us achieve a goal of becoming carbon-neutral by 2010.

Our Environmental Stewardship program has attracted the interest of many including stakeholders, clients,

competitors, media, NGO’s and employees. Clear, consistent and eff ective communication is critical to the

success of our eff orts. As a leader, we embrace our responsibility to actively contribute to the betterment of

society. Being a good corporate citizen is good business especially in the area of environmental sustainability.

Sally Wilson

Global Director of Environmental Strategy, CB Richard Ellis


Key Players at Bali

In 2007 climate change

moved up to the

very top of the world

political agenda. This

started with the EU

adopting a 20% or

30% reduction target

for 2020 (depending

on the involvement

of others). China

announced its fi rst

national climate change strategy and all major summits

adopted policy positions on climate change, starting with

the G8 and including Asia Pacifi c Economic Cooperation

(APEC), Association of South East Asian Nations (ASEAN)

and the Commonwealth.

The G-8 countries comprise about 65% of the world’s

economy, and have been the biggest emitters historically

and arguable responsible for the situation today. Their

wealth makes them the best situated economically to

respond to climate change.

The G-8 leader—the United States—is the major

holdout to ratifying the 1997 Kyoto Protocol. This non-

participation has created uncertainty about the rules for

U.S. businesses and all businesses that operate in U.S.

markets as well as creating uncertainty outside the

U.S., such as with business operating within European

carbon markets. This uncertainty has led a number of

state governments, such as California, to band together

to discuss regional climate regulations to fi ll the perceived

gap on the part of the federal government. Thus, busi-

nesses are faced with very wide-ranging rules in multiple

jurisdictions, which add to cost and complexity.

Other G-8 governments have and will continue to

tighten the rules about greenhouse gases and the

methods to lower them. The E.U. has already committed

Europe to reducing its continent-wide greenhouse gas

emissions by 20% below 1990 by 2020, and is willing

to commit to 30% below this fi gure if the U.S. comes

on board for talks.

How will business need to craft its position on climate change?

In 2008, the current green debate is likely to evolve into a more sophisticated dialogue, one

that is sharply focused on climate change issues. Th e stakes are high in the U.S. because NGOs,

policymakers, and competitors are all making decisions today that will shape tomorrow’s market

place and policy environment.

It is imperative that U.S. businesses are at the table for this debate, but claiming a place will involve

a diff erent kind of eff ort than in the past. Expect a shake-up in green issues. ‘Action before words’ will be the mantra

for 2008. Proof points and work completed will become a minimum threshold for media coverage. To the chagrin

of some businesses, merely stating aspirations and goals will no longer be newsworthy. Th e positive side is that

businesses that have taken credible steps of almost any variety can leverage this entrée in the green media space.

Mark Grundy, Edelman Corporate Social Responsibility & Sustainability

Former Communications Offi cer at the European Commission’s Environment Agency


Among the tools used to reduce greenhouse gas

emissions is emissions trading—already underway in

Europe in the form of the European Emissions Trading

Scheme and regionally planned for the U.S. The wealthy

G-8 members also want developing countries, as well,

to cut their emissions.

Firms in G-8 countries must be prepared to state their

climate change business agenda persuasively with

various governments, regulatory bodies, and appropriate

general publics.

Governments of developing countries, which will

experience the most rigorous impacts from climate change.

Some of these countries (such as China and India) are

also very large emitters of greenhouse gases. They want

the latest technologies from the developed countries

as an incentive to tackling climate change in their own

backyard, yet their hunger for building coal plants remains

far from satisfi ed. They note that the G-8 countries have

enjoyed decades of economic growth from their carbon

intensive energy usage, and that it’s unjust to demand cuts

from countries that are in the early phases of prosperity.

In the communications war during the Bali meeting,

China won praise for its recent shift to a much greener

stance, for working hard to cut emissions on a number of

fronts. Corporations with China-based operations need

to learn know how to work with these new stance and its

implications in a sensitive way.

The art of communicating about climate issues with devel-

oping countries can demand a lot from businesses. Many

key infl uencers in these countries regard the developed

world’s emphasis on cutting emissions as overblown when

it applies to developing world emissions. They object to

tariffs on biofuels from developing countries, for example,

and often have counter-tariffs on environmental goods and

services. These market obstacles can often play a major

role in the public discussion in developing countries.

Non-governmental organizations address various

climate change issues, from biodiversity and conservation

to energy usage and carbon sinks. Imaginative and persis-

tent businesses have enjoyed some notable successes at

cultivating valuable relationships among their former critics.

What impact will increased climate change regulation have on U.S. policy?

Th e Supreme Court’s 2007 ruling that CO is a pollutant under the Clean Air Act has

increased the chances that mandatory greenhouse regulation will become law under the

next President. But the main legislative vehicles are extremely complex, and the political

and economic implications are immense. Huge policy fi ghts are inevitable, and passage

of a sweeping program, while perhaps likely, is not at all certain.

Paul Bledsoe, Edelman Senior Counselor

Former White House Climate Change staff member


For example, GE and Occidental Petroleum have worked

closely with some of their leading NGO critics to refi ne their

own sustainability and environmental programs. In doing

so, they gain allegiance and goodwill from former critics.

As they continue to develop and grow in this shifting,

fl uid environment, multinationals of all sizes must be

alert to their own climate vulnerabilities, as well as the

opportunities they present.

Business: Much of the work of Bali happens in the

blocks of the agenda labeled “informal groups,” and it

is here that business has made its presence felt. There

were also business side events, most notably, the fi rst

ever Global Bali Business Day hosted December 10 by

the World Business Council on Sustainable Development

(WBCSD) and the International Chamber of Commerce.

The Bali Global Business Day (10 December 2007)

brought together some 350 decision makers from

companies, governments, inter-governmental and non-

governmental organizations. United Nations Framework

Convention on Climate Change (UNFCCC) Executive

Secretary Yvo de Boer, during his opening remarks at the

Bali Global Business Day, declared: “The engagement of

the business sector in fi ghting climate change is crucial...

An international climate change deal for the post 2012

period should therefore be designed in a way that makes

sense from a business point of view.” He added: “But fi rst

we need political agreement on the launch of negotiations

on such a new climate deal. And that has to happen this

week here in Bali.”

The message from UNFCCC to the global business

community was:

• $20 trillion of investment will be needed between

2005-2030 to meet the 50% increase in global energy

hunger; 50% of this investment will be needed in

developing countries; and 86% of these investments

will have to come from the private sector

What is the changing role of NGOs in the climate change debate?

Historically, businesses have been the unwilling target of government regulation, but

times are changing. Today, forward-looking businesses – often with NGO partners –

are keeping the heat on governments to devise the best regulatory framework. Smart

businesses and NGOs know that this framework needs to be sustainable in the broadest

sense – comprehensive, transparent, and eff ective, but one that harnesses the market to fi nd low-cost and long-

lasting solutions.

Peter Goldmark

Director of Climate & Air Program, Environmental Defense


What is the new role of business in shaping climate change regulation?

Th e issue of climate change is at a turning point – and it will soon change the business world

as we know it. Massive amounts of money are to be made and lost by not eff ectively addressing

or taking advantage of the commercial opportunities that climate change regulation presents.

New businesses will be created and others will disappear. As the fi rst of the UN climate change

meetings to include an offi cial Business Day, the Bali conference underscored the expectation

that business must be part of the solution.

Jonathan Wootliff, Edelman Senior Counselor

Former Greenpeace International Communications Director

• Bold action is needed in the North to fuel clean growth

in the South. Without cooperation, technology and

incentives, developing countries will have no choice but

to take the fossil-fuel heavy route to industrializing: a

new climate change deal has to build in the right incen-

tives for the developing world. This will represent huge

investment opportunities for low carbon technologies,

products and services.

• Fossil-fuel is here to stay, so new fossil-fuel technolo-

gies should be explored to reduce its impact

• Adaptation to climate change is now a reality for all

countries: a comprehensive framework that allows

all countries to adapt is called for. Levies on carbon

market mechanisms, like CDM, should be used to help

fi nance adaptation measures in developing countries

• Carbon markets alone will not work: a favorable

investment climate needs to be created through govern-

ment policies to drive new low carbon and adaptation

technologies into the market, using soft loans, venture

capital and tax incentives.


Carbon TraderFinancial Institution

Buy/sell

Company XGreen Friendly

Company YGreen Friendly

Company ZGreen Friendly

Carbon ReductionRedesign or Reinvest

to save

Carbon “Governing Bank”

The market has to be regulated and unified, so that prices are transparent and that “system gaming” is kept to a minimum

Credit Emission

4… then sell the reductions to companies that need to “offset” their emissions.

3Financial institutions and other intermediaries will make markets in these emissions reductions, buying them from green companies and projects, and…

1When carbon has a cost, carbon emissions will become a cost on the balance sheet. But businesses can also make money by cutting emissions.

2A “green” company creates emissions reductions, which it can then sell.

5Because of the cost of carbon emissions, Company A now has a stronger incentive to make reductions to its own carbon footprint.

6 The carbon markets needs a regulatory framework to certify that the emissions reductions are genuine, and that the market is functioning smoothly fairly. In the EU, the European Emissions Trading Scheme oversees the carbon market.

$fine

credit

Company AIndustrial

Company BGreen Friendly

Key Actions Coming Out of Bali

Key actions coming out of Bali dealt with four areas:

• Carbon trading • Technology transfer

• Deforestation • Adaptation fund

Carbon Trading

Carbon trading is one of the main methods Kyoto

uses to reduce greenhouse gas emissions. Countries

are given quotas for carbon emissions. If they emit

too much and cannot reach their national targets

from national measures alone, they are obliged to

buy other countries’ surplus credits under the Kyoto

Mechanism—either in the developing world through

the Clean Development Mechanism (CDM) or other

signatory countries under the Joint Implementation (JI).

If they emit less than their quota they can make money

by selling their own surplus credits.

America balks at paying billions of dollars a year to

developing nations just to buy enough carbon credits

to keep the US economy running. Under Kyoto, Russia

has billions of dollars worth of surplus carbon quota.

European policymakers refuse to buy credits without

actual projects for the obvious ethical reasons associated

with selling ‘hot air’: US policymakers refuse to support

a system that could generate billions of dollars of income

for Russia and so help accelerate its growing power.

Under the European

Emissions Trading

Scheme, emitters

can buy the right to

emit additional levels

of carbon above the

ceiling at which their

fi rm was capped,

and the monies paid

go to other fi rms who

didn’t use their full

quota of credits.

In theory, the price

of emitting carbon

should keep rising,

which would then

give businesses

within the system an

incentive to reduce

their CO2 levels. The

EU maintains that

carbon trading could

allow Europe to cut

its own emissions

by up to 30% and

this newly-created

market-based

system is preferred

to a fl at carbon tax.

The Bali Agenda

What the European Carbon Market looks like


Multi-nationals may already be complying with EU regula-

tions. In the US, such fi rms can elaborate publicly on their

carbon experience, where appropriate.

Deforestation

Deforestation contributes about 20% to total greenhouse

gas emissions today. Protecting forests was not part of the

Kyoto Protocol, which has proved a major gap in mitigation

efforts. The Bali meeting attempted to address this gap.

REDD is an acronym for Reducing Emissions from Defor-

estation and forest Degradation. In practice, REDD would

mean payments from G-8 countries to heavily forested

countries like Indonesia and Brazil for every hectare of

forest that they save from cutting.

Companies should review their activities for implications

in this area. For instance, cosmetics and food companies

are large users of palm oil, which comes from large

plantations often built on deforested land—an issue for

such names as P&G, Nestle, Kraft, and Burger King.

Improved monitoring of forests from space and

anti-corruption measures are a part of this initiative.

Multinational companies need to understand their own

stake in these issues.

Technology Transfer

The theory behind technology transfers is simple. Rather

than emerging economies relying on coal, they receive

the latest energy technology at a much-lowered price,

bypassing the older, carbon-based energy sources.

The Clean Development Mechanism (CDM) allows indus-

trialized countries to invest in projects that reduce emis-

sions in developing countries as an alternative to more

expensive emission reductions in their own countries.

Private sector investment in CDM projects are the main

drivers behind technology transfer.

CDM projects have been booming in China, India and

Brazil, but much less CDM fi nancing has reached Africa—

which is a key topic at Bali. Less developed countries and

small island states are being marginalised from the CDM,

as they are unable to compete with the returns on invest-

ment offered by the industrial scale CDM projects in the

emerging economies.

Do you have a stake in the energy or other technologies

that are candidates for transfer to developing countries?

How can multinationals prepare to seize public relations

advantages from these transfers, and at the same time

take steps to protect their intellectual property.

How do you fold emissions trading into the agenda of companies looking to manage their

carbon footprint?

I think this depends on the footprint and reduction strategy of each company. If a company has

a large footprint and determines that off sets are an important tool for them, they might set up

a hedging program, examples of which abound, ranging from airlines to power plants. Other

companies may have smaller footprints and be able to implement projects that neutralize their

footprint, and even perhaps create off sets themselves. In both cases, trading may or may not be

a core activity of the company. However, a robust emissions trading market will benefi t them by making the price

more transparent and lowering transaction costs when they do need to enter the market to buy or sell.

Gia Schneider

Vice President, Energy-Trader and Environment Markets, Credit Suisse Energy


How can multinationals prepare to seize public relations advantages from these transfers, and at

the same time take steps to protect their intellectual property?

Th e Asia Pacifi c region is likely to be hard hit by the impacts

of climate change, particularly because of rising sea levels and

the increased incidence of severe tropical storms. Yet much of

this region has made very little contribution to the build up of

greenhouse gases. Business needs to recognize that it has a role

in mitigating the worst eff ects of climate change and work with others to ensure

that further economic growth is consistent with a need to reduce carbon footprints. Businesses can also be part

of the much-needed technology transfer into the region. Importantly, there is a need for new partnerships with

government and civil society organizations to ensure that dangerous climate instability is avoided.

Richard Welford, Edelman Senior Counselor

Director, CSR Asia

Adaptation Fund

Another signifi cant part of the struggle to stabilize the

climate is adaptation—improving the world’s resilience

in the face of impacts from climate change such as sea-

level rise, worsened storms, heat waves, and increasing

levels of infectious disease.

Developing countries demanded more money put into

the Adaptation Fund, which is designed to help the

poorest countries respond to the built-in impacts of

climate change, such as fl ooding, drought, sea-level rise,

increased infectious disease. At Bali, the Adaptation Fund

comprises only about $36 million, but the total could

rise to $1-$5 billion yearly by 2030 if investment in green

technology in developing nations surges, according to the

highest U.N. projections at the meeting.

There are business implications of adaptation measures

because risk issues—at the heart of adaptation—are often

a public relations challenge.

For example, multinationals must often publicly stress their

preparedness and resiliency for governments, shareholders

and insurers, announcing their business continuity manage-

ment plans and creating plausible messages about their

readiness for business interruptions.

What are the implications of the Bali Conference for U.S. business?

Until 2009, the U.S. administration is likely to ‘continue-as-is’, refusing to put targets on

mandatory cuts. President Bush has announced a climate-change meeting in Hawaii in 2008

for 17 of the world’s major greenhouse-gas emitters to talk about setting ‘new’ goals for curbing

emissions. Critics have dismissed the Bush meeting as an attempt to dilute the Bali agenda.

Jonathan Adashek, Edelman Corporate Social Responsibility & Sustainability

Member of the US delegation to the third Conference of the Parties to the UNFCCC in Kyoto, Japan


From a business

standpoint, 2008 will

be the year of carbon

sequestration.

Carbon Sequestration

One hope for slowing the build up of CO2 in the atmosphere is carbon sequestra-

tion—fi nding some reliable way for storing carbon underground, or in the oceans.

Possible methods are still very much in the drawing board phase. These include:

• Sequestering carbon in underground geologic repositories.

• Enhancing the ability of the earth’s biosphere to remove CO2 from the

atmosphere by vegetation and storage in biomass and soils.

• Enhancing the oceans’ uptake of CO2 from the atmosphere by fertilization of

phytoplankton with nutrients, and injecting CO2 into the deepest parts of the ocean.

• Sequencing the genomes of microbes that could “eat” the carbon and produce

fuels such as methane and hydrogen as a byproduct.

There are enormous technical obstacles to each of these projects. In the short-

term, sequestration may not help us much, and there are daunting environmental

issues to consider—even a small leak of carbon could create a major climate

catastrophe. But the promise of sequestration is considerable. Most advanced

scientifi c nations are conducting active research in this area.

From a business standpoint, 2008 will be the year of carbon sequestration. The

UNFCCC is expected to recognize it within its CDM markets for the fi rst time and,

in Europe, the EU will announce the acknowledgement of carbon sequestration

and the awarding carbon credits for projects within the Emissions Trading Scheme.


What Happens Post-Bali

How is the climate communications landscape changing?

Th e next two years of post-Kyoto negotiations will constitute a period of uncertainty for

European business on climate change. Th e potential growth and destiny of Europe’s fl edgling

carbon market, which is currently hanging in the balance, will be determined by either

UNFCCC or bi-lateral settlements. Buy-in from the U.S and China could potentially lead

to the world’s fi rst global carbon market and bring about massive new investment possibilities:

No buy-in would mean continuing marginalized, regional carbon markets – leading to an inherent weakness in

the carbon price – and ultimately undermining EU and UNFCCC eff orts to champion market-based instruments,

such as the European Emissions Trading Scheme.

Xavier Delacroix

Managing Director, First&42nd Paris

At Bali, the U.S. refused to accept language calling for 40%

cuts in emissions by 2020—the number that seemed to

come up most often, based on IPCC projections. Despite

this lack of consensus at Bali, the UNFCCC process will

press on in an effort to fi nd a post-Kyoto settlement. For

the UNFCCC and EU the starting bell rings on January 1,

2008 and the race will run until the end of 2009. However,

if anything has been learnt from Kyoto the fi rst time around,

it’s that getting over 150 countries to come to an agree-

ment is an extremely cumbersome and painful process.

For this reason, the G8 route could be the way forward.

The fi rst real opportunity for a fi nalized climate agreement

with mandatory implications that has U.S. and China as

well as India sitting around the table with the Europeans

will probably wait until the G8 meeting in Italy, 2009. Even

then, it will take something out of the ordinary to wager a

deal. Behind closed doors on both sides of the Atlantic,

there is already talk of an ‘independent, private/public

technology share package’ being put together as an

incentive for China and India to bring in their own emis-

sions targets. To what extent this materializes is unknown,

but it is certain is that it would offer the most pioneering,

global businesses the opportunity to take a seat at the

table. If no binding reduction agreement is found, the

global business of climate change and the evolution of a

global carbon market will continue to grow but in a slow,

regionalized disjointed way as it does today

Until 2009, the U.S. administration is likely to ‘continue-

as-is’, refusing to put targets on mandatory cuts. Presi-

dent Bush has announced a climate-change meeting in

Hawaii in 2008 for 17 of the world’s major greenhouse-

gas emitters to talk about setting ‘new’ goals for curbing

emissions. The meeting is a follow-up to a summit that

Bush convened in late September. Critics have dismissed

the Bush meeting as an attempt to dilute the Bali agenda.

There is no telling what might emerge from this meeting.

For business, above all this means continued uncertainty.

Corporations in Europe will participate in the European

Trading Scheme, and the regional US carbon markets

will grow. Yet clear political direction and resolve will

probably be lacking. The understandable preference that

businesses have for regulatory consistency and clarity will

be frustrated for some time to come.


[email protected] | www.edelman.com

the road from bali: business opportunities and obstacles surrounding climate change

Documents

climate reports

climate change debate

greenhouse emissions

humaninduced climate

ambitious climate agreement

emissions of greenhouse

ipcc reports

worsening climate impacts